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1504(b)(3)), and the transactions are therefore not eliminated. was performing routine distribution and was charged prices and royalties based on the “resale price method,” which determines the appropriate arm’s-length range by the markups received by comparable distributors in uncontrolled, arm’s-length transactions. The IRS applied the residual-profit-split method, which allocated Glaxo Group profit first between “routine” functions performed by GSK U. and GSK Group, then split the remaining profit according to where the largest part of the value was created.Transfer prices directly affect the allocation of groupwide taxable income across national tax jurisdictions. 1.482-1(b), the standard to be applied to determine the true taxable income of a controlled taxpayer is that of a taxpayer dealing at arm’s length with an uncontrolled taxpayer. parent company), but also to intercompany services performed. Most foreign tax authorities also specify similar methods to choose from. was that the drugs were developed outside the United States, as was the marketing strategy it used to sell them. Based on the same facts, however, the IRS considered the marketing functions performed by GSK U. to have had a substantial role in creating demand for the drugs, and therefore, GSK U. A TOP TAX CONCERN Because of the inherent uncertainty in satisfying tax authorities and the potential dollar amounts involved, transfer pricing consistently ranks among the top tax concerns for multinationals.
Future taxable amounts resulting from likely adjustments to income relating to transfer-pricing positions may enable a company to lower valuation allowances against deferred tax assets. Under Topic 740, multinational corporations do not need to recognize deferred tax liabilities on those unrepatriated earnings, provided that they are expected to be “permanently or indefinitely reinvested” outside the United States.Although evaluating a company’s transfer-pricing positions depends on its facts and circumstances, a few general insights can shed light on the process companies may go through to identify UTBs related to transfer pricing.In the recognition phase, any intercompany transaction that could lead to an adjustment of income by the IRS or a foreign tax authority is considered to be an uncertain tax position.In determining the likelihood that the position will be sustained under audit, or the expected benefits that will be upheld as a result of an audit, several factors can be taken into consideration.
First, does an advance-pricing agreement (APA) cover the transaction in question?
Because of the inherent differences in judgment and interpretation of facts when analyzing a company’s transfer pricing, together with the clashing revenue objectives of multiple tax authorities and taxpayers, the risk of adjustments to taxable income, double taxation, and potential for penalties is nontrivial, even for multinationals that make good-faith efforts to comply with Sec. Disputes between tax authorities and taxpayers may arise in many areas, including: As an example of the last type of dispute, in 2006 the IRS and Glaxo Smith Kline Holdings (Americas) Inc. S.) settled a transfer-pricing dispute covering 1989 through 2005 for .4 billion, the largest settlement ever obtained by the IRS. Of audits reported in the 2010 survey, 20% resulted in a material penalty, compared with less than 4% in 2005.